How to Keep a Troubled Business Running |
Lawyers.comsm
Steering a business through a financial crisis can be daunting. Many important decisions confront financially distressed companies. Finding the right answers and avoiding common mistakes can make or break the business.
Making the best use of time and resources may turn your business around, and help your business avoid more drastic solutions such as bankruptcy.
Be Analytical and Decisive
Remaining calm, proactive and analytical can help management avoid the worst mistakes commonly made in tough times. These include laying off important employees, being dishonest with stakeholders and improperly managing finances.
It's important to review management and personnel roles before making premature changes. Too often, the wrong jobs are cut, or reductions go too far.
For example, the accounting department may be overhead, but is critical to survival or reorganization. If an accounting issue triggered the crisis, it may be necessary to replace those responsible. Any staff who have committed fraud, intentionally misrepresented accounts, or been totally incompetent should be replaced. However, it's also important to keep those who know the existing systems and records to help the business pull through the crisis.
Maintaining strong business relationships with creditors and vendors is crucial for your business to remain a going concern. The key to keeping their confidence is to play it straight with them. Disclose even bad news on a timely basis. Don't ignore your creditors, because they will think the worst anyway. And they will begin to distrust you.
Honesty and Business
Honesty with business vendors and suppliers and employees can help a business survive a financial crisis.
Your creditors and suppliers don't want your business to fail, and honesty can help you manage these relationships. Be upfront with your creditors and suppliers about your needs and your limits. Giving accurate financial information is crucial to keeping a good relationship with creditors, and increases the odds of a successful reorganization.
The same goes for your employees. Treat them with respect and keep them informed. If they feel misled they'll head for the door faster than you can close it.
Review Business Operations and Expenses
Carefully review business segments and wind up losing operations. Ignoring a failing portion of your business is a common mistake.
Business expenses should be reviewed. Nothing is sacred. Look at ways to reduce travel, insurance, rent and utility expenses. Don't rule out measures such as changing your location to save on rent or property taxes.
Conserving Cash
Your vendors will understandably want to operate on a cash basis until they're secure in your financial situation. Cash will also serve as the last resort if and when a bankruptcy filing becomes necessary. The utilities will need to be kept on, and trustee and appraiser fees and deposits paid until you can reestablish credit.
You can raise cash in a number of ways.
- Consider selling nonessential assets
- Borrow while you can
- Sell marketable securities
- Keep sales proceeds while you can, even if a secured lender may recover them later on
You don't want to run afoul of securities or bankruptcy laws when trying to raise cash by issuing securities or violating creditors' rights.
Legal Compliance Is Important
It's important for a business, and its owners and officers, to obey the law when facing financial crisis. It isn't a crime for a business to be insolvent, and it's not worth breaking the law to save a business.
Business owners have good intentions and put themselves at risk personally when trying to save a business. A common mistake: Using payroll withholding taxes for operating expenses. The penalties are stiff. And you risk converting a business liability into a personal one. The IRS and state departments of taxation routinely impose penalties on the responsible person for failure to remit payroll tax. It's not worth it.
The unpaid taxes can also foul chances for a business's reorganization in bankruptcy.
Financial pressures can lead even seasoned managers into making bad decisions. Short-term fixes can come back to haunt you. Candor, prudence and avoiding common mistakes enhances the chances a business will survive. And even if bankruptcy becomes unavoidable, your chances of a successful reorganization will be better.
Questions for Your Attorney
- I won't be able to make my loan and account payments. Is there anything short of bankruptcy I can do to hold off creditors and actions such as repossession?
- If I can't pay all my creditors, which ones should I pay first?
- What's a prepackaged reorganization, and will it help me get out of bankruptcy faster?
Related Resources on Lawyers.comsm
- Contact a Bankruptcy Law Lawyer in your area for specific legal advice, and read about Business Bankruptcy: Selecting a Good Lawyer
- Need a form? Access a variety of do-it-yourself business and personal legal forms that meet your needs
- Read Business Bankruptcy FAQ, Bankruptcy: Chapter 11 Reorganizations - Overview or access more Bankruptcy Law articles and information
- Visit the Legal Forums for discussions on Bankruptcy Law topics
- Follow us on Twitter and "Like" us on Facebook to join the conversation about Lawyers.com topics online
- Download the Lawyers.com app for the iPhone or access the mobile site
- Legal Dictionary
Related Web Links
-
US Bankruptcy Courts